Eric Abetz's failed attempt to fix public service pay-fixing will waste millions

When it comes to APS wage negotiations, it seems no one in government knows what productivity means.

By Paddy Gourley

In 2009, Liberal senator Eric Abetz and his then leader, Malcolm Turnbull, got into cahoots with a Treasury official skilled in the fabrication of emails, which, if they had not been faked, would have had the then prime minister in hot water. It became known as the Utegate saga. The official, Godwin Grech, even sent a message to Arthur Sinodinos, in his pre-senatorial phase, asking him to tell Abetz that ''I am a Lib''. Sinodinos replied: ''Will do, mate.'' As the Public Service Minister, Abetz is now the champion of a code of conduct that frowns on such shenanigans.

At the end of March, Abetz released the government's rules for industrial relations bargaining in the APS. He said they were ''designed to enable taxpayers to receive greater value for money at a time when the nation has been left in its worst ever financial mess by Labor''. Unfortunately, the policy will give taxpayers less value for money while the claim that the nation is ''in its worst-ever financial mess'' is just a pack of lies. For example:

For most of the time between 1920 and 1955, Australian government debt was a higher proportion of gross domestic product than it is now.

The current level of what the OECD calls ''general government gross financial liabilities'' as a proportion of GDP in Australia is 36.4 per cent, compared with Canada's 104.7 per cent, Japan's 231.9 per cent, Britain's 111 per cent, the United States' 106.3 per cent and the Euro area's 107.4 per cent.

The current budget balance as a proportion of GDP is lower than that in the US, Japan, Britain, France, Italy, the Netherlands, Spain and Brazil, among others.

Then it gets worse. Far from improving productivity in the public service, the course Abetz has now set will stifle it and he will incur direct transaction costs many times greater than those if there were a single bargain for the entire APS based on rates paid for comparable work by other employers.

With some minor tweaks, the Coalition's bargaining guidelines are essentially the same as those of the Keating, Howard, Rudd and Gillard governments. That is, remuneration increases should be offset by productivity gains negotiated on an agency basis. Thus, I asked Abetz:

''Did the Public Service Commission (or any other government agency) provide you with advice about any measurable, net productivity gains that have derived from the operation of the agency-based bargaining system?'' A spokesman for the minister replied: ''The Public Service Commission does not compile or have access to that information.''

''What estimates have you made of the costs of individual agency bargaining compared to a single public service-wide bargain?'' The spokesman said: ''These estimates have never been made due to the complexity and elliptical nature of the task.''

These are astounding admissions: the commission, and the Department of Workplace Relations before it, did not collect or try to assess whether these long-standing bargaining policies had been achieving their objectives, nor did it make any calculations of their costs.

Let's have a back-of-the envelope crack at them. Between 2003 and 2013, after taking into account movements of functions in and out of the APS, staff numbers have increased by about 23 per cent. If it were to be assumed that, in that period, the APS's output had increased by 23 per cent (it's likely to be less than that), labour productivity would have remained stagnant. More plausibly, it has gone backwards.

In the decade to 2013, it's unlikely the Treasury's functions and output changed much, yet in that time its staffing levels went up by 33 per cent. That is, there's a strong, prima facie case that its productivity has declined.

Estimating the costs involved in administering the new bargaining guidelines is neither complex nor ''elliptical'' (whatever that might mean). Let's make a few rough assumptions:

That, under a single APS bargain, the commission might need to devote five person years to its negotiation and that consultation with the 100 or so individual agencies might cost them one-quarter of a staff year. That is, the total staff cost could come to about 30 person years.

That, under the current guidelines, where each agency negotiates separate bargains, the public service might need to devote at least five person years to the supervision and management of the system (it needs to approve all bargains) and that more than 100 individual agencies might, on average, spend two person years. That is, the total staff cost would be more than 200 person years: seven times that of a single bargain and at a price of perhaps $20 million more. The total staff cost alone since the present bargaining arrangements were introduced in the early 1990s could be more than $200 million without apparent net benefits. This is what Abetz wants to perpetuate.

Treasurer Joe Hockey has said the guiding principle for the forthcoming budget will be to ensure that inefficient spending was ''rooted out''. Not so with wage bargaining in the public service, where it is apparently good enough to waste large amounts of money for no sound reasons.

Abetz seems not to have informed himself of the gloomy experience with productivity and cost in the system he's now perpetuating, nor apparently have officials advised him about it. In the ''children overboard'' fiasco in 2001, then defence minister Peter Reith at least was told that navy videos did not show asylum seekers throwing their children into the sea. Reith said: ''Well, we'd better not see the videos then.'' It looks a little worse with the public service bargaining guidelines. So much for ministerial curiosity for policy soundly based on experience and the capacity of the public service to provide frank and fearless advice.

The unfortunate fact is that requiring improvements in pay and conditions to be offset by productivity gains (and Abetz's office has confirmed that the offsets must be 100 per cent - a point left obscure in his guidelines) creates a range of perverse incentives, especially in public sector organisations whose outputs are generally fixed or predetermined. For example:

It rewards staff in unproductive agencies, who are more likely to get a pay increase than those in productive ones.

It tempts staff in productive agencies to create productivity-stifling practices that can be traded off for pay rises.

It works on the explicit understanding that one person's pay rise will mean another's job. Such a sword of Damocles approach to personnel management is not the way to create a motivated and productive workforce - it will destroy it.

It is for these and other reasons that there is no evidence the bargaining system now perpetuated by Abetz will dampen productivity improvement in the public service.

It's no wonder such crazy policy is confusing its authors and staff in the Public Service Commission, and those in agencies who have to live with it. For example:

A spokeswoman from the commission reportedly said there was ''nothing that prevents agencies from negotiating to increase hours … as a productivity offset for wage increases''.

A senior officer in the Bureau of Meteorology apparently wrote to staff, saying an ''example of a genuine productivity gain is an increase in the ordinary weekly hours of work".

Let's be clear: increasing hours of work has nothing to do with increasing productivity. Productivity is the number of units of output produced per unit of input, typically measured in hours worked. Indeed, increasing the number of hours worked will most likely reduce productivity for the simple reason that, the longer people work at a stretch, the more tired they get, so the units of output per extra hour worked and the average for all hours tends to go down.

The minister and the commission, if necessary in consultation with the Treasury and the Bureau of Statistics, need to issue clarifying advice to agencies defining productivity and warning them that any draft agency bargains seeking to increase pay and conditions on the basis of increasing hours of work will almost certainly be unacceptable.

Abetz has also said that any increases in public service remuneration must be in line with community ''expectations''. It's unclear how agencies will be able to measure that. Moreover, the productivity offsets used to justify improvements in pay are to be regarded as ''on-water matters'': a veil of secrecy is to be drawn around them and they will not be disclosed to the public. That is, the community is to be given no information that it can use to make up its mind as to whether public service remuneration is within its expectations or not.

A standard test of any government remuneration policy is the extent to which ministers are prepared to apply it to themselves and other parliamentarians. Thus, I asked Abetz: ''Does the government intend to make submissions to the Remuneration Tribunal suggesting that any increases the tribunal might wish to make for members of Parliament, including ministers … be offset by productivity gains that can be attributed to changes made by these office holders?''

The minister's spokesman dodged the question but said: ''The Remuneration Tribunal's current determination on parliamentarians' remuneration is already based on workload and productivity.'' Being unable to find any reference to productivity in the relevant tribunal decisions, I asked Abetz's office if it could indicate what it relied on for its claim. The spokesman said: ''The fact that productivity is not specifically listed in a determination does not mean that it was not considered. The Remuneration Tribunal operates independently of government and the government is not privy to its deliberations.'' That is, Abetz's office's claim (presumably blessed by the minister) that the remuneration of parliamentarians is based in part on productivity is utterly baseless.

It's hard to think of an area of policy that is more shambolic, fraudulent and counterproductive than the government's IR bargaining arrangements for the public service. It has been indulged for many years and is a proven failure. At huge extra costs, it has smothered productivity and efficiency, inhibited the movement of staff between agencies and wrecked the touted notion of ''One APS''. Ian Watt hasn't even got a ''One Department of the Prime Minister and Cabinet''.

Previous governments got away with a policy of productivity offsets for remuneration improvements because they were prepared to cheat on it; that is, there was no significant offsetting. But if the Abbott government's intention is to be strict about offsets on top of relatively high efficiency dividends, pay rises will be limited to zero or something close to it, pay rates will become uncompetitive, recruitment will become difficult, good staff will leave and those who remain will be demotivated. Productivity, taxpayer value for money and standards of service will decline.

Abetz had the chance to clean up this mess and he fluffed it. But perhaps it's not too late. He seemed to show some contrition for his part in the Utegate saga, and he and Cormann ditched the election pledge to cut 12,000 staff.

If he's big enough, Abetz will do taxpayers, those dependent on government services, public servants and himself a big favour. He will abandon the bargaining guidelines he issued recently and do what every other sensible employer in the country does: base remuneration on what is needed to keep it in a reasonable market position for comparable work. That in itself will promote productivity by underpinning the recruitment, retention and motivation of staff, and it will satisfy community expectations about what is fair and reasonable. Come on, minister: see the light.